IMF urges China to check runaway growth

China's economic growth could easily top 10 pct this year if Beijing fails to rein in the expansion, the IMF said today while warning of a possible "boom-bust cycle."
The International Monetary Fund, in its annual assessment of the Chinese economy, said it was "appropriate" for Beijing to stick with a policy of promoting "gradual and controlled" exchange rate movements.
The IMF report said that despite some calls for an acceleration of exchange rate flexibility, it shares Beijing's concern that such a move could have "an adverse impact on macroeconomic stability."
The report said IMF directors "commended the authorities for sustaining high economic growth and noted that China's prospects for the future remain favorable, provided that the risks and challenges faced by the country are addressed."
The report also "endorsed the government's medium-term economic reform strategy, particularly the need to rebalance the economy away from heavy dependence on investment and exports for growth towards consumption."
It said the IMF staff projects economic growth in China to remain "around 10 pct" in 2006, but only if authorities take steps to check investment.
"Unless these policy actions are taken, GDP growth could easily exceed the 10 pct forecast," the report said.
"In the near term, a significant risk remains that macroeconomic policies will not be sufficiently tight to contain investment growth. In particular, there is a need for monetary policy to prevent a surge in credit growth from tipping off a boom-bust cycle and an associated rise in banks nonperforming loans."
The IMF report appeared to back Beijing's view that its fragile financial system cannot yet handle the volatility of a freely floating exchange rate, but there was some internal debate about the role of the yuan in global trade imbalances.
"Many (IMF) directors found it appropriate for China to continue to allow greater flexibility in its exchange rate in a gradual and controlled manner," the report said.
"They shared the authorities' concern that accelerating exchange rate flexibility could have an adverse impact on macroeconomic stability. Some of these directors also viewed that exchange rate adjustment alone would have a limited impact on external balances.
"A number of other directors, however, stressed that the flexibility afforded by the current exchange rate system should be used more extensively."
The IMF officials "noted that greater exchange rate flexibility, along with other policy changes and reforms in China, will aid in rebalancing the economy over the medium term, and will contribute to the orderly resolution of the global current account imbalance."